Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Proposed Rules 18417 

products identified in this rulemaking 

action. 

Regulatory Findings 

We determined that this proposed AD 

would not have federalism implications 

under Executive Order 13132. This 

proposed AD would not have a 

substantial direct effect on the States, on 

the relationship between the national 

Government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. 

For the reasons discussed above, I 

certify this proposed regulation: 

1. Is not a ‘‘significant regulatory 

action’’ under Executive Order 12866; 

2. Is not a ‘‘significant rule’’ under the 

DOT Regulatory Policies and Procedures 

(44 FR 11034, February 26, 1979); and 

3. Will not have a significant 

economic impact, positive or negative, 

on a substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

We prepared a regulatory evaluation 

of the estimated costs to comply with 

this proposed AD and placed it in the 

AD docket. 

List of Subjects in 14 CFR Part 39 

Air transportation, Aircraft, Aviation 

safety, Safety. 

The Proposed Amendment 

Accordingly, under the authority 

delegated to me by the Administrator, 

the FAA proposes to amend 14 CFR part 

39 as follows: 

PART 39—AIRWORTHINESS 

DIRECTIVES 

1. The authority citation for part 39 

continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40113, 44701. 

§ 39.13 [Amended] 

2. The FAA amends § 39.13 by adding 

the following new AD: 

Dassault Aviation: Docket No. FAA–2007–

27849; Directorate Identifier 2006–NM–

249–AD. 

Comments Due Date 

(a) We must receive comments by May 14, 

2007. 

Affected ADs 

(b) None. 

Applicability 

(c) This AD applies to Dassault Model 

Falcon 2000EX airplanes, S/N (serial 

number) 82; and Falcon 900EX (version 

F900DX) airplanes, S/Ns 601 through 605; 

certificated in any category. 

Reason 

(d) The mandatory continuing 

airworthiness information (MCAI) states that 

following the incorporation of a design 

change to the Karman fairing, it has been 

determined that some stringer reinforcements 

(F900DX) and some rivets (F900DX/ 

F2000EX) are missing from the skin panels 

on each side of the fuselage between frames 

9 and 10 on certain Falcon 900DX and Falcon 

2000EX EASy aircraft. This situation affects 

the structural integrity of the fuselage and 

may lead to an unsafe condition if left 

uncorrected. The MCAI was issued to recover 

the certificated structural strength by adding 

the missing rivets and checking the condition 

of the adjacent structure, and to add the 

missing stringer caps on F900DX (as 

appropriate). These actions include 

inspecting the area, including holes and 

structure, where missing rivets are found, 

and contacting the manufacturer if the holes 

are out-of-round beyond tolerance, or if 

cracks are found, as applicable. 

Actions and Compliance 

(e) Within 3 months after the effective date 

of this AD, unless already done, do the 

following actions: Inspect and repair the 

aircraft in accordance with the instructions of 

Dassault Service Bulletin F900EX–308, dated 

October 18, 2006, for version F900DX, S/N 

601 through 605; and Dassault Service 

Bulletin F2000EX–133, dated September 28, 

2006, for Model F2000EX S/N 82. 

FAA AD Differences 

Note: This AD differs from the MCAI and/ 

or service information as follows: No 

differences. 

Other FAA AD Provisions 

(f) The following provisions also apply to 

this AD: 

(1) Alternative Methods of Compliance 

(AMOCs): The Manager, International 

Branch, ANM–116, FAA, ATTN: Tom 

Rodriguez, Aerospace Engineer, 1601 Lind 

Avenue, SW., Renton, Washington 98057–

3356, has the authority to approve AMOCs 

for this AD, if requested using the procedures 

found in 14 CFR 39.19. Before using any 

AMOC approved in accordance with § 39.19 

on any airplane to which the AMOC applies, 

notify the appropriate principal inspector in 

the FAA Flight Standards Certificate Holding 

District Office. 

(2) Airworthy Product: For any 

requirement in this AD to obtain corrective 

actions from a manufacturer or other source, 

use these actions if they are FAA-approved. 

Corrective actions are considered FAAapproved if they are approved by the State 

of Design Authority (or their delegated 

agent). You are required to assure the product 

is airworthy before it is returned to service. 

(3) Reporting Requirements: For any 

reporting requirement in this AD, under the 

provisions of the Paperwork Reduction Act, 

the Office of Management and Budget (OMB) 

has approved the information collection 

requirements and has assigned OMB Control 

Number 2120–0056. 

Related Information 

(g) Refer to MCAI EASA Emergency 

Airworthiness Directive 2006–0320–E, dated 

October 18, 2006; Dassault Service Bulletin 

F900EX–308, dated October 18, 2006; and 

Dassault Service Bulletin F2000EX–133, 

dated September 28, 2006, for related 

information. 

Issued in Renton, Washington, on April 5, 

2007. 

Stephen P. Boyd, 

Acting Manager, Transport Airplane 

Directorate, Aircraft Certification Service. 

[FR Doc. E7–6932 Filed 4–11–07; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–144859–04] 

RIN 1545–BD72 

Section 1367 Regarding Open Account 

Debt 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: This document proposes 

amendments to the regulations relating 

to the treatment of open account debt 

between S corporations and their 

shareholders. These proposed 

regulations provide rules regarding the 

definition of open account debt and the 

adjustments in basis of any 

indebtedness of an S corporation to a 

shareholder under section 1367(b)(2) of 

the Internal Revenue Code (Code) for 

shareholder advances and repayments 

on advances of open account debt. The 

proposed regulations affect shareholders 

of S corporations and are necessary to 

provide guidance needed to comply 

with the applicable tax law. This 

document also provides notice of a 

public hearing. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by July 11, 2007. Outlines 

of topics to be discussed at the public 

hearing scheduled for July 31, 2007, at 

10 a.m., must be received by July 10, 

2007. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–144859–04), room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

also may be hand-delivered Monday 

through Friday between the hours of 8 

a.m. and 4 p.m. to: CC:PA:LPD:PR 

(REG–144859–04), Courier’s Desk, 

Internal Revenue Service, 1111 

Constitution Avenue, NW., Washington, 

DC, or sent electronically, via the 

Federal eRulemaking Portal at http:// 


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18418 Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Proposed Rules 

www.regulations.gov (IRS REG–144859–

04). The public hearing will be held in 

the IRS Auditorium, Internal Revenue 

Building, 1111 Constitution Avenue, 

NW., Washington, DC. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Stacy L. Short or Deane M. Burke, (202) 

622–3070; concerning submissions of 

comments, the hearing, and/or to be 

placed on the building access list to 

attend the hearing, Richard Hurst at 

(202) 622–2949 (TDD Telephone) (not 

toll free numbers) and his e-mail 

address is 

Richard.A.Hurst@irscounsel.treas.gov, 

(202) 622–7180 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507). Comments on the 

collections of information should be 

sent to the Office of Management and 

Budget, Attention: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attention: 

IRS Reports Clearance Officer, T:FP, 

Washington, DC 20224. 

The recordkeeping requirement in 

these proposed regulations is in 

§ 1.1367–2(a)(2)(i). This information 

must be maintained by the shareholder 

to ensure that the indebtedness of the S 

corporation to the shareholder 

continues to meet the definition of open 

account debt found in § 1.1367–

2(a)(2)(i). The recordkeepers will be S 

corporation shareholders who have 

open account debt. 

The following estimates are an 

approximation of the average time 

expected to be necessary for a collection 

of information. They are based on the 

information that is available to the 

Internal Revenue Service. Individual 

recordkeepers may require greater or 

less time, depending on their particular 

circumstances. 

Estimated total annual recordkeeping 

burden: 250 hours. 

Estimated average annual burden: 

Hours per recordkeeper varies from .75 

to 1.25 hours, depending on individual 

circumstances, with an estimated 

average of 1 hour. 

Estimated number of recordkeepers: 

250. 

Estimated annual frequency of 

recordkeeping: On occasion. 

Background 

This document proposes to amend 

§ 1.1367–2 of the Income Tax 

Regulations (26 CFR part 1) regarding 

the definition of open account debt and 

adjustments in basis of indebtedness for 

shareholder advances and repayments 

on advances of open account debt. 

Section 1367(a)(1) provides that the 

basis of each shareholder’s stock in an 

S corporation is increased by the 

shareholder’s pro rata share of the S 

corporation’s income (separately and 

nonseparately computed items of 

income) and the excess of the 

deductions for depletion over the basis 

of the property subject to depletion. 

Section 1367(a)(2) provides that the 

basis of each shareholder’s stock in the 

S corporation is decreased by the 

shareholder’s pro rata share of 

distributions not includible in income 

of the shareholder by reason of section 

1368 (nontaxable distributions), losses 

and deductions (separately and nonseparately computed losses), any 

expense of the corporation that is not 

deductible and not properly chargeable 

to capital account, and certain 

deductions for depletion for any oil and 

gas property held by the S corporation. 

Under section 1367(b)(2)(A), if for any 

taxable year the amounts specified in 

section 1367(a)(2) (other than 

distributions) exceed the amount which 

reduces the shareholder’s basis to zero, 

such excess losses and deductions shall 

be applied to reduce (but not below 

zero) the shareholder’s basis in any 

indebtedness of the S corporation to the 

shareholder. Section 1367(b)(2)(B) 

provides that if a shareholder’s basis in 

indebtedness is reduced for any taxable 

year, any net increase (the amount by 

which the items described in section 

1367(a)(1) exceed the items described in 

section 1367(a)(2)) for any subsequent 

taxable year is applied to restore the 

reduction in basis in indebtedness 

before any of the excess is used to 

increase basis in stock. 

On January 3, 1994, the Treasury 

Department and the IRS published final 

regulations under section 1367 of the 

Code (TD 8508, 59 FR 12, amended on 

December 22, 1999 (TD 8852, 64 FR 

71641)). Those final regulations relate, 

in part, to adjustments to basis in both 

stock of shareholders and indebtedness 

of an S corporation to its shareholders. 

Section 1.1367–2 of the Income Tax 

Regulations provides specific rules for 

required adjustments (reductions and 

restorations) to basis in any 

indebtedness of an S corporation to a 

shareholder. Section 1.1367–2(a) also 

provides that for purposes of 

adjustments to basis of indebtedness to 

shareholders, shareholder advances not 

evidenced by separate written 

instruments and repayments on the 

advances (open account debt) are 

treated as a single indebtedness. 

Further, § 1.1367–2(a) provides that the 

basis of indebtedness of the S 

corporation to a shareholder is reduced 

as provided in § 1.1367–2(b) and 

restored as provided in § 1.1367–2(c). 

Thus, the basis adjustment rules under 

the final regulations apply to all 

indebtedness of an S corporation to a 

shareholder, whether the indebtedness 

is evidenced by a written instrument or 

is open account debt. 

Section 1.1367–2(b) provides the rules 

for the reduction of basis of 

indebtedness of an S corporation to a 

shareholder. Generally, under § 1.1367–

2(b)(1), if the basis of a shareholder’s 

stock in the S corporation has been 

reduced to zero under section 

1367(a)(2), the excess of certain losses 

and deductions specified in section 

1367(a)(2) is applied to reduce (but not 

below zero) the basis of any 

indebtedness of the S corporation to the 

shareholder held by the shareholder at 

the close of the S corporation’s taxable 

year. Any indebtedness of the S 

corporation to the shareholder that has 

been satisfied by the S corporation, or 

disposed of or forgiven by the 

shareholder during the taxable year, is 

not held by the shareholder at the close 

of that year and is not subject to basis 

reduction. Further, § 1.1367–2(b)(2) 

provides that if the interest of the 

shareholder in the S corporation is 

terminated during the taxable year, the 

rules in § 1.1367–2(b) are applied to any 

indebtedness of the S corporation to the 

shareholder held by the shareholder 

immediately before the termination of 

the shareholder’s interest in the S 

corporation. If a shareholder holds more 

than one indebtedness at the close of the 

taxable year (or, if applicable, 

immediately prior to the termination of 

the shareholder’s interest in the 

corporation), the basis of each 

indebtedness is reduced under 

§ 1.1367–2(b)(3) in the same proportion 

that the basis of each indebtedness bears 

to the aggregate bases of the 

indebtedness of the S corporation to the 

shareholder. 

Section 1.1367–2(c) provides the rules 

for restoring basis of indebtedness of an 

S corporation to a shareholder. 

Generally, under § 1.1367–2(c)(1), if, for 

any taxable year of the S corporation, 

there has been a reduction in the basis 

of an indebtedness of the S corporation 

to a shareholder, any net increase in any 

subsequent taxable year of the S 

corporation is applied to restore that 

reduction. For purposes of § 1.1367–2, a 


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net increase is the amount by which the 

shareholder’s pro rata share of S 

corporation items described in section 

1367(a)(1) exceed the items described in 

section 1367(a)(2) for the taxable year. 

The restoration rules apply only to 

indebtedness held by the shareholder as 

of the beginning of the taxable year in 

which the net increase arises. Further, 

the reduction in basis of indebtedness 

must be restored before a net increase is 

used to restore the shareholder’s basis in 

stock. The shareholder’s basis in 

indebtedness may not be restored above 

the adjusted basis of the indebtedness 

under section 1016(a) (excluding any 

prior year’s adjustments under section 

1367), determined as of the beginning of 

the taxable year in which the net 

increase arises. 

Under § 1.1367–2(c)(2), if a 

shareholder holds more than one 

indebtedness as of the beginning of an 

S corporation’s taxable year, any net 

increase is applied first to restore the 

reduction of basis in any indebtedness 

repaid (in whole or in part) in that 

taxable year to the extent necessary to 

offset any gain that would otherwise be 

realized on the repayment. Any 

remaining net increase is applied to 

restore each outstanding indebtedness 

in proportion to the amount that the 

basis of each outstanding indebtedness 

has been reduced and not restored. 

Section 1.1367–2(d) provides rules for 

the time at which adjustments to basis 

of indebtedness under section 

1367(b)(2) are effective. Generally, 

under § 1.1367–2(d)(1) the amount of 

the adjustments to basis of indebtedness 

are determined and effective as of the 

close of an S corporation’s taxable year. 

However, if the shareholder is not a 

shareholder in the S corporation at that 

time, the adjustments are effective 

immediately before the shareholder’s 

interest in the S corporation is 

terminated. Moreover, if a debt is 

disposed of or repaid, in whole or in 

part, before the close of the taxable year, 

the basis of that debt is restored 

effective immediately before the 

disposition or the first repayment on the 

debt during the taxable year. 

On August 25, 2005, the Tax Court 

issued its decision in Brooks v. 

Commissioner, TC Memo. 2005–204. In 

Brooks, the taxpayer borrowed money 

from a bank and advanced that money 

as open account debt to his S 

corporation in one taxable year and 

reduced basis in that open account debt 

for losses passed through to the taxpayer 

at the end of that same year. In the first 

few weeks of the subsequent taxable 

year, the S corporation repaid the open 

account debt (the taxpayer then repaid 

his debt for the borrowed money). Late 

in that subsequent year, the taxpayer 

advanced additional money (again, 

amounts borrowed from a bank) in an 

amount that offset the repayment of 

advances to avoid the recognition of 

gain from repayment of the 

indebtedness. Also, the taxpayer’s 

advances increased the shareholder’s 

basis in the indebtedness and allowed 

losses for that year to pass through to 

the taxpayer shareholder. Taxpayer and 

the S corporation made these 

repayments and advances for several 

taxable years and deferred indefinitely 

the recognition of income on any 

repayment of his open account debt. 

The court in Brooks held ‘‘that the 

basis of the open account indebtedness 

is properly computed by netting at the 

close of the year advances of open 

account debt during the year and 

repayments of open account debt during 

the year.’’

Explanation of Provisions 

The Treasury Department and the IRS 

believe that the concept of ‘‘open 

account debt’’ as defined in § 1.1367–

2(a) was intended to provide 

administrative simplicity for S 

corporations but was not intended to 

permit the deferral allowed in Brooks. 

The IRS and Treasury Department are 

proposing these amendments to narrow 

the definition of open account debt and 

to modify the rules for adjustments of 

basis in indebtedness for the more 

narrowly defined open account debt. 

In these proposed regulations, open 

account debt is defined as shareholder 

advances not evidenced by separate 

written instruments for which the 

principal amount of the aggregate 

advances (net of repayments on the 

advances) does not exceed $10,000 at 

the close of any day during the S 

corporation’s taxable year. Included 

within that definition are separate 

advances under a line of credit 

agreement if the advances are not 

evidenced by a separate written 

instrument. Open account debt is 

treated as a single indebtedness. This 

$10,000 limitation on open account debt 

for the purposes of the § 1.1367–2 

regulations is modeled after section 

7872(c)(3) and the § 1.7872–9 proposed 

regulations, which provide a $10,000 de 

minimis exception to the treatment of 

loans with below-market interest rates 

for compensation-related or corporationshareholder loans. 

Under these proposed regulations, to 

determine whether shareholder 

advances and repayments on the 

advances exceed the $10,000 aggregate 

principal threshold on any day during 

the S corporation’s taxable year for open 

account debt, the shareholder will have 

to maintain a ‘‘running balance’’ of 

those advances and repayments, and the 

outstanding principal amount of the 

open account debt. If the resulting 

aggregate principal of the running 

balance does not exceed $10,000 at the 

close of any day during the S 

corporation’s taxable year, the advances 

and repayments on advances would 

constitute open account debt, would be 

treated as a single indebtedness, and 

would be accounted for at the close of 

the taxable year (as explained in this 

preamble). However, if the resulting 

aggregate principal of the running 

balance exceeds $10,000 at the close of 

any day during the S corporation’s 

taxable year, the entire principal 

amount of that indebtedness would no 

longer constitute open account debt 

effective at the close of the day on the 

date the amount of the running balance 

exceeds $10,000. This principal amount 

would be treated as indebtedness 

evidenced by a written instrument for 

that taxable year, and would be 

accounted for according to the timing 

rules in § 1.1367–2(d) for that taxable 

year and subsequent taxable years. Any 

new shareholder advances not 

evidenced by a written instrument and 

repayments on those advances within 

the $10,000 aggregate principal 

threshold amount during the taxable 

year would constitute a new open 

account debt. 

The proposed regulations also modify 

the manner in which repayments on 

open account debt are accounted for 

under the existing final § 1.1367–2 

regulations. These rules are separate 

from the maintenance of a running 

balance of the advances and repayments 

to determine if a shareholder has 

exceeded the $10,000 threshold amount. 

For purposes of accounting for open 

account debt, each shareholder, at the 

end of the S corporation’s taxable year, 

must determine if that shareholder has 

made a net advance or received a net 

repayment on open account debt for that 

taxable year. To determine if a net 

advance or a net repayment has 

occurred, each shareholder, at the end 

of the S corporation’s taxable year, must 

net all advances and repayments made 

during the year without regard to the 

outstanding principal amount of the 

open account debt. If, at the end of the 

taxable year, a net repayment exists, the 

net repayment must be taken into 

account effective at the close of the S 

corporation’s taxable year under the 

general basis adjustment rules in the 

existing final § 1.1367–2 regulations. If, 

at the end of the taxable year, a net 

advance exists, the net advance is 

combined with the outstanding 


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18420 Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Proposed Rules 

aggregate principal balance of the 

existing open account debt and that 

amount is carried forward to the 

beginning of the subsequent taxable year 

as the outstanding aggregate principal 

amount of the open account debt. If at 

any time during the taxable year the 

resulting aggregate principal of the 

running balance exceeds the $10,000 

threshold amount so the entire principal 

amount of the indebtedness no longer 

constitutes open account debt, the 

running balance must be reconciled 

effective at the close of the day the 

balance exceeds $10,000 to determine 

the aggregate principal amount of the 

indebtedness, and for the remainder of 

the taxable year that principal amount is 

treated in the same manner as 

indebtedness evidenced by a written 

instrument for the purposes of this 

section. 

Proposed Effective Date 

The regulations, as proposed, apply to 

any shareholder advances to the S 

corporation made on or after the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register and repayments 

on those advances by the S corporation. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. Because these 

regulations do not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, this notice 

of proposed rulemaking will be 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Comments and Public Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written comments (a signed original and 

eight (8) copies) or electronic comments 

that are submitted timely to the IRS. The 

IRS and the Treasury Department 

request comments on the clarity of the 

proposed rules and how they can be 

made easier to understand. All 

comments will be available for public 

inspection and copying. 

A public hearing has been scheduled 

for July 31, 2007, beginning at 10 a.m. 

in the IRS Auditorium, Internal Revenue 

Building, 1111 Constitution Avenue, 

NW., Washington, DC. Due to building 

security procedures, visitors must enter 

at the Constitution Avenue entrance. In 

addition, all visitors must present photo 

identification to enter the building. 

Because of access restrictions, visitors 

will not be admitted beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

information about having your name 

placed on the building access list to 

attend the hearing, see the ‘‘FOR FURTHER

INFORMATION CONTACT’’ section of this 

preamble. 

The rules of 26 CFR 606.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments at the hearing 

must submit electronic or written 

comments and an outline of the topics 

to be discussed and time to be devoted 

to each topic (a signed original and eight 

(8) copies) by July 10, 2007. A period of 

10 minutes will be allotted to each 

person for making comments. An 

agenda showing the scheduling of the 

speakers will be prepared after the 

deadline for receiving outlines has 

passed. Copies of the agenda will be 

available free of charge at the hearing. 

Drafting Information 

The principal authors of these 

regulations are Stacy L. Short and Deane 

M. Burke of the Office of the Associate 

Chief Counsel (Passthroughs and 

Special Industries), IRS. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAX 

Paragraph 1. The authority citation 

for part 1 is amended by adding an entry 

in numerical order to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.1367–2 also issued under 26 

U.S.C. 1367(b)(2). * * * 

Par. 2. Section 1.1367–2 is amended 

as follows: 

1. Paragraph (a) is revised. 

2. Paragraphs (c)(2) and (d)(1) are 

revised. 

3. Paragraph (d)(2) is redesignated as 

paragraph (d)(3). 

4. New paragraph (d)(2) is added. 

5. Paragraph (e) is amended by adding 

Examples 6 and 7. 

The revisions and additions read as 

follows: 

§ 1.1367–2 Adjustments to basis of 

indebtedness to shareholder. 

(a) In general—(1) Adjustments under 

section 1367. This section provides 

rules relating to adjustments required by 

subchapter S to the basis of 

indebtedness (including open account 

debt as described in paragraph (a)(2) of 

this section) of an S corporation to a 

shareholder. The basis of indebtedness 

of the S corporation to a shareholder is 

reduced as provided in paragraph (b) of 

this section and restored as provided in 

paragraph (c) of this section in 

accordance with the timing rules in 

paragraph (d) of this section. 

(2) Open account debt—(i) General 

rule. The term open account debt means 

shareholder advances not evidenced by 

separate written instruments and 

repayments on the advances, the 

aggregate outstanding principal of 

which does not exceed $10,000 of 

indebtedness of the S corporation to the 

shareholder at the close of any day 

during the S corporation’s taxable year. 

Advances and repayments on open 

account debt are treated as a single 

indebtedness. For purposes of 

determining if shareholder advances not 

evidenced by separate written 

instruments and repayments on those 

advances exceed an aggregate 

outstanding principal of $10,000, a 

shareholder must maintain a running 

daily balance of all advances and 

repayments on those advances and the 

outstanding principal amount of the 

open account debt at the close of each 

day during the S corporation’s taxable 

year. 

(ii) Exception. If a shareholder’s 

running balance exceeds an aggregate 

outstanding principal amount of 

$10,000 at the close of any day during 

the S corporation’s taxable year, 

effective on the close of the day on 

which the shareholder’s running 

balance exceeds $10,000, the running 

balance must be reconciled to determine 

the aggregate principal amount of 

indebtedness. For the remainder of the 

taxable year, that aggregate principal 

amount of indebtedness is treated in the 

same manner as indebtedness evidenced 

by a separate written instrument for 

purposes of this section. For the 

remainder of that taxable year and 

subsequent taxable years, the 

indebtedness is not open account debt 

and is subject to all basis adjustment 

rules applicable to basis of indebtedness 

of an S corporation to a shareholder in 

this section. 

* * * * * 

(c) * * * (1) * * * 

(2) Multiple indebtedness. If a 

shareholder holds more than one 


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indebtedness (including any open 

account debt and any debt treated as a 

single indebtedness under paragraph 

(a)(2)(ii) of this section) as of the 

beginning of an S corporation’s taxable 

year, any net increase is applied first to 

restore the reduction of basis in any 

indebtedness repaid (in whole or in 

part) in that taxable year to the extent 

necessary to offset any gain that would 

otherwise be realized on the repayment. 

Any remaining net increase is applied to 

restore each outstanding indebtedness 

(including any open account debt and 

any debt treated as a single 

indebtedness under paragraph (a)(2)(ii) 

of this section) in proportion to the 

amount that the basis of each 

outstanding indebtedness has been 

reduced under section 1367(b)(2)(A) and 

paragraph (b) of this section and not 

restored under section 1367(b)(2)(B) and 

this paragraph (c). 

(d) Time at which adjustments to 

basis of indebtedness are effective—(1) 

In general. Except as provided in 

paragraph (d)(2) of this section, the 

amounts of the adjustments to basis of 

indebtedness provided in section 

1367(b)(2) and this section are 

determined as of the close of the S 

corporation’s taxable year, and the 

adjustments are generally effective as of 

the close of the S corporation’s taxable 

year. However, if the shareholder is not 

a shareholder in the S corporation at 

that time, these adjustments are 

effective immediately before the 

shareholder terminates his or her 

interest in the S corporation. If a debt 

(including any open account debt and 

any debt treated as a single 

indebtedness under paragraph (a)(2)(ii) 

of this section) is disposed of or repaid 

in whole or in part before the close of 

the taxable year, the basis of that 

indebtedness is restored under 

paragraph (c) of this section, effective 

immediately before the disposition or 

the first repayment on the debt (or the 

net repayment on open account debt) 

during the taxable year. To the extent 

any reduction of basis in indebtedness 

under paragraph (b) of this section that 

is disposed of or repaid (in whole or in 

part) during the taxable year is not 

restored completely under paragraph (c) 

of this section, gain is realized on the 

repayment effective immediately before 

the indebtedness is disposed of or 

repaid (in whole or in part). 

(2) Open account debt—(i) In general. 

All advances and repayments on open 

account debt (as described in paragraph 

(a)(2)(i) of this section) during the 

taxable year are netted continuously as 

the advances and repayments occur. 

The amount of any net advance or net 

repayment on open account debt for the 

S corporation’s taxable year is 

determined at the close of the taxable 

year. If the shareholder advances, and 

repayments on the advances, during the 

S corporation’s taxable year result in a 

net advance or net repayment, the basis 

of the open account debt is reduced as 

provided in paragraph (b) of this section 

and restored as provided in paragraph 

(c) of this section effective at the close 

of the taxable year. To the extent any 

reduction of basis of open account debt 

under paragraph (b) of this section that 

is disposed of or repaid (in whole or in 

part) during the taxable year is not 

restored completely under paragraph (c) 

of this section, income is realized on the 

net repayment at the close of the taxable 

year in which the open account debt is 

disposed of or repaid (in whole or in 

part). 

(ii) Exception. On the close of the day 

on which the shareholder’s running 

balance exceeds an aggregate 

outstanding principal amount of 

$10,000, the shareholder’s running 

balance is reconciled to determine an 

aggregate principal amount of 

indebtedness. The resulting aggregate 

principal amount of indebtedness is 

treated as the principal amount of a debt 

evidenced by a separate written 

instrument for the remainder of that 

taxable year and any subsequent taxable 

year, and is no longer subject to the 

open account debt provisions of this 

section. 

* * * * * 

(e) * * * 

* * * * * 

Example 6. Treatment of open account 

debt. (i) A has been the sole shareholder in 

Corporation S since 2000. In 2007, A 

advances S $8,000, which is not evidenced 

by a written instrument. The $8,000 advance 

is open account debt and remains 

outstanding at that amount during 2007. On 

December 31, 2007, the basis of A’s stock is 

zero; and the basis of the open account debt 

is reduced under paragraph (b) of this section 

to $4,000. On April 1, 2008, S repays $3,000 

of the open account indebtedness. On 

September 1, 2008, A advances S an 

additional $2,000, which is not evidenced by 

a written instrument. There is no net increase 

under paragraph (c) of this section in year 

2007 or 2008. 

(ii) At no time during the 2007 taxable year 

does the running balance of A’s open account 

debt exceed $10,000. As of December 31, 

2007, A’s basis in the open account debt is 

reduced under paragraph (b) of this section 

to $4,000. 

(iii) At no time during the 2008 taxable 

year does the running balance of A’s open 

account debt exceed $10,000. On April 1, 

2008, S’s $3,000 repayment is applied to A’s 

running balance for open account debt 

carried forward from 2007 in the amount of 

$8,000 to reduce the running balance to 

$5,000. On September 1, 2008, A’s advance 

to S of $2,000, which is not evidenced by a 

written instrument, is applied to A’s running 

balance to bring A’s aggregate outstanding 

principal on A’s open account indebtedness 

to $7,000. 

(iv) At the close of the 2008 taxable year, 

the $3,000 April repayment S makes to A and 

A’s $2,000 September advance are netted to 

result in a net repayment of $1,000 for the 

taxable year on A’s $8,000 open account debt 

carried forward from 2007. Because there is 

no net increase in 2008, no basis of 

indebtedness is restored for the 2008 taxable 

year. 

Example 7. Treatment of shareholder 

indebtedness not evidenced by a written 

instrument which exceeds $10,000. (i) The 

facts are the same as in Example 6, in 

addition to which, on February 1, 2008, S 

repays $1,000 of the open account debt and 

on March 1, 2008, A advances S $5,000, 

which is not evidenced by a written 

instrument. 

(ii) At no time during the 2007 taxable year 

does the running balance of A’s open account 

debt exceed $10,000. As of December 31, 

2007, the basis of the open account debt is 

reduced under paragraph (b) of this section 

to $4,000. 

(iii) The running balance of A’s open 

account debt does exceed $10,000 during the 

2008 taxable year. On February 1, 2008, S’s 

$1,000 repayment is applied to A’s running 

balance for open account debt carried 

forward from 2007 in the amount of $8,000 

to reduce the running balance to $7,000. On 

March 1, 2008, A’s advance to S of $5,000, 

which is not evidenced by a written 

instrument, is applied to A’s running balance 

to bring A’s aggregate outstanding principal 

on A’s open account debt to $12,000. Because 

this amount exceeds the $10,000 threshold 

amount, effective at the close of the day on 

March 1, 2008, A’s running balance must be 

reconciled to determine an aggregate 

principal amount of indebtedness. 

(iv) As of March 1, 2008, S had made a 

$1,000 repayment on A’s open account debt, 

and A had advanced an additional $5,000 

which was not evidenced by a written 

instrument. To reconcile A’s running 

balance, the $1,000 repayment and $5,000 

advance are netted first to result in a $4,000 

net advance that is then added with A’s 

existing principal amount of open account 

debt of $8,000 to determine the aggregate 

principal amount of indebtedness of $12,000. 

As of March 1, 2008, S’s indebtedness to A 

that is not evidenced by a written instrument 

has a principal balance of $12,000 and a basis 

of $8,000 ($4,000 basis on December 31, 2007 

+ $4,000 net advance). On April 1, 2008, S 

repays $3,000 of that new indebtedness. 

(v) On September 1, 2008, A advances S an 

additional $2,000, which is not evidenced by 

a written instrument. The $2,000 advance is 

considered new open account debt. On 

December 31, 2008, A’s basis in his stock is 

zero and the outstanding principal in the two 

remaining debts are as follows: 


rmajette on PROD1PC67 with PROPOSALS
18422 Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Proposed Rules 

3/1/08 

principal 

4/1/08 

repayment 

9/1/08 

advance 

12/31/08 

principal 

Indebtedness treated as if evidenced by written instrument ........................................... $12,000 $3,000 .................... $9,000 

Open account debt .......................................................................................................... .................... .................... $2,000 2,000 

Par. 3. Section 1.1367–3 is amended 

as follows: 

1. The section heading is revised. 

2. The first sentence of the paragraph 

is revised. 

3. A new second and last sentence are 

added. 

The revisions and additions read as 

follows: 

§ 1.1367–3 Effective dates and transitional 

rules. 

Section 1.1367–2(a), (c)(2), (d)(2), and 

(e) Example 6 and Example 7 apply to 

any shareholder advances to the S 

corporation made on or after the date 

these regulations are published as final 

regulations in the Federal Register and 

repayments on those advances by the S 

corporation. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E7–6764 Filed 4–11–07; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 100 

[CGD05–07–031] 

RIN 1625–AA08 

Special Local Regulations for Marine 

Events; York River, Yorktown, VA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Coast Guard proposes to 

establish special local regulations 

during the ‘‘Watermen’s Heritage 

Festival Workboat Races,’’ a marine 

event to be held July 15, 2007 on the 

waters of the York River, Yorktown, 

Virginia. These special local regulations 

are necessary to provide for the safety of 

life on navigable waters during the 

event. This action is intended to 

temporarily restrict vessel traffic in a 

portion of the York River during the 

event. 

DATES: Comments and related material 

must reach the Coast Guard on or before 

May 14, 2007. 

ADDRESSES: You may mail comments 

and related material to Commander 

(dpi), Fifth Coast Guard District, 431 

Crawford Street, Portsmouth, Virginia 

23704–5004, hand-deliver them to 

Room 415 at the same address between 

9 a.m. and 2 p.m., Monday through 

Friday, except Federal holidays, or fax 

them to (757) 398–6203. The 

Inspections and Investigations Branch, 

Fifth Coast Guard District, maintains the 

public docket for this rulemaking. 

Comments and material received from 

the public, as well as documents 

indicated in this preamble as being 

available in the docket, will become part 

of this docket and will be available for 

inspection or copying at the above 

address between 9 a.m. and 2 p.m., 

Monday through Friday, except Federal 

holidays. 

FOR FURTHER INFORMATION CONTACT: 

Dennis Sens, Project Manager, Fifth 

Coast Guard District, Inspections and 

Investigations Branch, at (757) 398–

6204. 

SUPPLEMENTARY INFORMATION: 

Request for Comments 

We encourage you to participate in 

this rulemaking by submitting 

comments and related material. If you 

do so, please include your name and 

address, identify the docket number for 

this rulemaking (CGD05–07–031), 

indicate the specific section of this 

document to which each comment 

applies, and give the reason for each 

comment. Please submit all comments 

and related material in an unbound 

format, no larger than 81⁄2 by 11 inches, 

suitable for copying. If you would like 

to know they reached us, please enclose 

a stamped, self-addressed postcard or 

envelope. We will consider all 

comments and material received during 

the comment period. We may change 

this proposed rule in view of them. 

Public Meeting 

We do not now plan to hold a public 

meeting. But you may submit a request 

for a meeting by writing to the address 

listed under ADDRESSES explaining why 

one would be beneficial. If we 

determine that one would aid this 

rulemaking, we will hold one at a time 

and place announced by a later notice 

in the Federal Register. 

Background and Purpose 

On July 15, 2007, the Watermen’s 

Museum of Yorktown, VA will sponsor 

‘‘Watermen’s Heritage Festival 

Workboat Races’’ on the York River, 

immediately adjacent and north of the 

shoreline at Yorktown River Cliffs. The 

event will consist of approximately 40 

traditional Chesapeake Bay deadrise 

workboats racing along a marked 

straight line race course in heats of 2 to 

4 boats for a distance of approximately 

1000 yards. Due to the need for vessel 

control during the event, the Coast 

Guard will temporarily restrict vessel 

traffic in the event area to provide for 

the safety of participants, spectators and 

other transiting vessels. 

Discussion of Proposed Rule 

The Coast Guard proposes to establish 

temporary special local regulations on 

specified waters of the York River, 

Yorktown, Virginia. The regulations will 

be in effect from 9 a.m. to 5:30 p.m. on 

July 15, 2007. The effect will be to 

restrict general navigation in the 

regulated area during the event. Except 

for persons or vessels authorized by the 

Coast Guard Patrol Commander, no 

person or vessel may enter or remain in 

the regulated area. Vessel traffic will be 

allowed to transit the regulated area at 

slow speed between heats, when the 

Coast Guard Patrol Commander 

determines it is safe to do so. These 

regulations are needed to control vessel 

traffic during the event to enhance the 

safety of participants, spectators and 

transiting vessels. 

Regulatory Evaluation 

This proposed rule is not a 

‘‘significant regulatory action’’ under 

section 3(f) of Executive Order 12866, 

Regulatory Planning and Review, and 

does not require an assessment of 

potential costs and benefits under 

section 6(a)(3) of that Order. The Office 

of Management and Budget has not 

reviewed it under that Order. It is not 

‘‘significant’’ under the regulatory 

policies and procedures of the 

Department of Homeland Security 

(DHS). 

We expect the economic impact of 

this proposed rule to be so minimal that 

a full Regulatory Evaluation is 

unnecessary. Although this regulation 

will prevent traffic from transiting a 

portion of the York River during the 

event, the effect of this regulation will 

not be significant due to the limited 

duration that the regulated area will be 

in effect and the extensive advance 


rmajette on PROD1PC67 with PROPOSALS